Legal Knowledge Center

As a franchise attorney, I am always asked by business owners how they go about determining when it is time to franchise their business. Like any other legal or business question, the answer is generally “it depends.” However, there are a few questions that you can ask yourself to test your readiness.

Before discussing the tests, it would be helpful to know what a franchise is.

Franchising is defined and governed at both the federal and state levels (although Georgia does not have a franchise statute). Thus, for purposes of federal law, there are three factors that will be used to identify a franchise relationship: 1) the right to use a trademark; 2) significant control or assistance; and 3) a required payment. All factors must be present in order for a business relationship to be deemed a “franchise.”

So, here are the questions a potential franchisor needs to ask themselves before going down this path. First, has my business been successful? It is hard to sell a franchise concept to a potential franchisee if the business has not been successful for the owner. This is also important because the franchised business will need to generate enough income to pay a royalty to the franchisor (generally 5-8% of gross sales). Now, something to consider is the increased buying power of multiple units. So, theoretically, increased buying power should lower certain costs for the franchisee, increasing margins which then may be used to assist in paying royalties.

Another question to ask is if there are people wanting to buy your concept. I have seen single unit restaurant owners start successful franchises because they had someone in the wings waiting to buy one. This “ready buyer” helps to fund the initial cost of the franchise because of the upfront franchise fee required by franchisors (generally in the $20k-$30k range).

Do you have the time, talent, and staff to help make franchisees successful? Generally, the founder of the business will be the CEO of the franchise entity and will probably wear many hats. Staff from the original restaurant may be the ones training and supporting/monitoring the franchisees, so you will need the capacity to do so.

One of the myths of franchising is that it requires a huge upfront investment of capital and structure to do it. That is simply not the case. If you have run a successful business and have a passion to grow it, franchising could be the perfect vehicle to do so.Is Your Restaurant Ready to Franchise?In my practice, I do not charge for the initial consultation to discuss these questions with you. You may be sitting on a franchise goldmine!